Fetch TV chief executive Scott Lorson has warned of a bloodbath in the nascent digital video-streaming sector where few winners will prevail, as some of Australia's most iconic media companies prepare to invest tens of millions in uncharted territory.
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Subscription video-on-demand (SVOD) services allow viewers to stream television series and movies via the internet on to devices including laptops, tablets and connected TVs.
Nine Entertainment Co Holdings and Fairfax Media last month announced a $100 million SVOD venture known as StreamCo, while Seven West Media has signed a non-binding agreement with pay TV operator Foxtel about teaming up on its Presto service.
The ventures serve as a pre-emptive strike against the widely expected arrival of global powerhouse Netflix.
"Whilst few deny the consumer appeal of a Netflix-style proposition, the viability of the business model in Australia is far less clear," Mr Lorson said.
"With a buy-in of circa-$100 million, strong competition, and a model characterised by low ARPUs [average revenue per user] and high churn, there are likely to be few spots on the winner podium. Overseas experience suggests that seas of red ink lie ahead."
Mr Lorson's business, which offers a personal recording device, movies to rent and linear subscription channels – and is close to break-even – could be hurt if streaming services go mass market, although it sees its service as complementary.
Streaming is seen as a potential way for the networks to capture a chunk of the advertising dollars migrating from free-to-air TV to digital platforms. Australian TV companies witnessed the decline of newspapers largely due to the migration of classified ad dollars to digital players such as SEEK, Carsales.com and REA Group, and they are trying to get ahead of the curve.
Video-on-demand services account for a growing chunk of the audience in the United States, where Netflix has more than 33 million customers.
Morgan Stanley analyst Andrew McLeod said the Australian online video-streaming market could be worth between $850 million and $1.1 billion.
Netflix, tipped to launch in Australia in 2015, has a good chance of capturing the dominant share of the local market due to its global scale advantage in programming, marketing and technology, Mr McLeod said.
Credit Suisse analyst Fraser McLeish said established TV players had to act now to minimise the impact Netflix could have on their revenues. "Existing players here need to try to make it as hard as possible for them to come in and make it look as hard a market as possible for them, in terms of getting hold of content or the strength of the existing offerings," he said.
"Free-to-air is still going to be the destination for live sport, news, big reality shows and first-run drama, but then binge-watching of slightly older series, or your more niche programming – that's where streaming will come in.
"It's probably the biggest threat to multi-channels rather than to what the free-to-airs are showing in prime time."
Pre-emptive price-cutting
There is a debate over whether pay TV is more at risk than free-to-air TV from the emergence of an SVOD market. Foxtel, jointly owned by Telstra and News Corporation, is the most profitable television business in the country, but take-up of its main satellite and cable service has been stuck at about 30 per cent due to its high price and local laws that limit pay TV's ability to offer exclusive sports content.
Foxtel has embarked on an aggressive price-cutting strategy to ready itself for the launch of low-cost subscription options Netflix and StreamCo, which will likely charge consumers $10 a month for their service. Foxtel has halved the price of its SVOD service Presto to $9.99 a month.
Nine chief executive David Gyngell has suggested that Foxtel may not be as motivated as StreamCo to succeed in the space due to fears of cannibalising its main subscription TV business.
"Why does Foxtel want to cut Channel Nine into a business where they're really going to try hard, which they may believe can destroy some value in their business," he said at Nine's annual result last month.
"I don't believe Foxtel would have the same ambitions that we would. We're stepping up from free to paid . . . They'd be stepping down from paying a lot to paying less for something."
Foxtel's director of corporate affairs Bruce Meagher said Presto is a different offering to its full-service subscription model. "Presto is targeted at relatively light viewers who would traditionally have augmented free-to-air viewing with the odd DVD rental," he said. "The main Foxtel service is for the large number of Australians who love television and the broad range of content and powerful technology that Foxtel offers."
